Copyright © Daniel Cullinane CPA.
PRICE IS RISING
While most of Wall Street focuses on large and mega cap stocks, as they provide a degree of safety and liquidity, many investors are limited in the number of shares they can buy. Often the biggest public companies, especially the technology giants, trade in the low-to-mid hundreds, all the way up to over $1,000 per share. At those steep prices, it’s pretty hard to get any decent share count leverage.
Many investors, especially more aggressive traders, look at lower-priced stocks as a way to not only make some good money but to get a higher share count. That can really help the decision-making process, especially when you are on to a winner, as you can always sell half and keep half.
Each and every week, we screen our 24/7 Wall St. research database looking for stocks rated Buy at major firms and priced under the $10 level (last week’s picks included tech, energy and cannabis plays), and this week was no exception. We found five more stocks that could provide investors with some solid upside potential. While more suited for aggressive accounts, they could prove exciting additions to portfolios looking for solid alpha potential.
This micro-cap stock has the potential to double for investors. Civeo Corp. (NYSE: CVEO) engages in the provision of workforce accommodations, logistics and facility management services to the natural resource industry. Its Canada segment provides accommodation services through lodges, open camps and mobile assets, which supports workforces from oil sands and in a variety of oil and natural gas drilling, mining and related natural resource applications, as well as disaster relief efforts.
The Australia segment provides accommodations services on a day rate basis to mining and related service companies, such as construction contractors, while its U.S. segment provides open camp facilities and highly mobile smaller camps that follow drilling rigs and completion crews as well as accommodation, office and storage modules that are placed on offshore drilling rigs and products platforms.
Stifel has a giant $4.50 price target on the shares, and that compares to the Wall Street consensus target of $3.67. The stock has traded below $1.50 for the past week.
This company can benefit from increased construction around the country. Concrete Pumping Holding Inc. (NYSE: BBCP) engages in the provision of concrete pumping services and concrete waste management services. Its brands include US Concrete Pumping-Brundage-Bone, UK Concrete Pumping-Camfaud and Concrete Waste Management Services-Eco-Pan.
The company recently announced plans to acquire Capital Pumping, and the deal is expected to close in the second calendar quarter of 2019. On a pro forma basis giving effect to the acquisition of Capital Pumping expects its net leverage to decline by the end of its fiscal year 2019 to 3.5 times or below from approximately 4.4 times as of December 6, 2018, which is the date Capital Pumping consummated its business combination with Industrea Acquisition. The company believes that it will generate cash flows following the acquisition that will allow it to further reduce its net leverage ratio.
Stifel’s price target is a huge $9, while the consensus target is $8.33. Shares have traded below $4.50 for the past week.
Memorial Day weekend is the unofficial start of the American summer driving season as millions of Americans take advantage of warm weather and a three-day weekend to barbecue, bask on the beach, or just take a road trip with friends and family.
And while gasoline prices have been on the rise for much of the year, Memorial Day weekend car travel will be a little more affordable as gasoline prices dip from the same time last year. However, there’s no guarantee lower gas prices will endure for the entire Memorial Day to Labor Day driving season.
This year, more Americans are planning summertime road trips, according to an annual report by GasBuddy, the Boston-based tracker of real-time national gasoline prices. The survey of 1,680 GasBuddy members suggests that nearly 75% of Americans will take a road trip this summer, a 16 percent increase from last year.
“The largest seasonal surge in gas prices since 2011 isn’t slowing down travel plans this summer as more Americans are hitting the road than staying home, according to GasBuddy’s 2019 Summer Travel survey.
Indeed, the price at the pump had been increasing in recent months as refiners began building stockpiles for the summer driving season.
But in recent weeks, gas prices have declined since hitting the second-largest seasonal rise ever on May 4. This decline may not last through the summer, but GasBuddy estimates a 14-cent price reduction on a gallon of gasoline for Memorial Dyy weekend compared to the same weekend last year.
One reason for the gentle decline from higher gas prices earlier this year is that crude oil prices have remained fairly stable in recent months and remains below prices from the same period last year. West Texas Intermediate crude oil was trading at around $63 per barrel on Tuesday, down from $72 per barrel at the same time last year.
“[This] is one reason helping gas prices be cheaper than last year at this time,” Jeanette Casselano, spokesperson for the American Automobile Association, said in a May 20 press statement. “Today, motorists can find gas for $2.75 or less at nearly half of all gas stations in the country.”
The price of gasoline varies based largely on local taxes, retail markups, and transportation costs. According to data released in January by the American Petroleum Institute, Alaska had the lowest state gasoline tax.
But it also had the the fourth-highest price per gallon among the 50 states because of Alaska’s location and dearth of state refining capacity. Pennsylvania has the highest state gasoline tax but ranks 15th in the highest price at the pump because of the state’s proximity to refineries in the Northeast. Texas, Louisiana, Colorado, and Virginia are among the states with the lowest retail gasoline prices.
As people plan their summer road trips, it’s worth noting that road safety can be as variable as fuel prices. Some roads are more dangerous than others.
Obviously densely populated cities are where most road accidents happen, but fatal cart crashes tend to occur in more sparsely populated areas where people tend to drive at higher speeds and emergency responders can take longer to arrive. Accidents in population centers might be less fatal, but driving through them during long road can mean stuck in maddening, time-sucking traffic congestion. Take a look at the worst cities to drive in every state.
The Dow (DJIA) is up 11.84% this year to 26,089.61, which means it is close to its all-time high. Among its 30 components, one has posted a stock price of almost triple that rate so far this year. Shares of Microsoft Corp (NASDAQ: MSFT) are up 30.40% to $132.45. That puts its market cap over $1 trillion.
A look at some of the comments about Microsoft from experts.
Evercore ISI analyst Kirk Materne reiterated his Outperform rating on Tuesday, citing the company’s large opportunity in the gaming market.
“Microsoft is one of the few companies that have the potential to be both a leading content provider as well as a leading platform for gaming publishers,” he wrote. “Ultimately, we believe gaming can become the next major narrative as it relates to Microsoft’s long-term growth opportunity.”
Since taking over as CEO in 2014, Satya Nadella has reinvented Microsoft into a cloud leader that has become one of only two providers that can deliver a wide variety of platform-as-a-service/infrastructure-as-a-service solutions at scale. Microsoft has accelerated the transition from a traditional perpetual license model to a subscription model and embraced the open-source movement.
“Microsoft has stepped up the game,” said Maribel Lopez, principal analyst of Lopez Research. “The competitive pressure for both Salesforce and Tableau is the fact that the Microsoft story is hanging together much better than it was in the past.”
According to Gartner Research, Microsoft is listed as a leader in a recent report on analytics and business-intelligence platforms, with cautious comments noting that the company only offers its software on its Azure cloud service.
Based on recent news out of and about the company, its rise is likely to continue
MAY NEWSLETTER 4
Idioms are defined as fascinating phrases that add color to otherwise more complex discussions — a way to make them more understandable to a broad audience.
In this case, the appropriate idiom for China’s latest move is the concept of a “silver bullet.” According to Merriam-Webster, a silver bullet would be the appropriate description for “something that acts as a magical weapon,” especially “one that instantly solves a long-standing problem.”
If the Chinese devalue the yuan, they think they may win the trade war and fix their horrendous debt overhang that otherwise is guaranteed to cause a massive recession. Such a contraction could be as serious to China as the 2008 Great Recession or the 1930s Depression in the U.S.
Japan, as you may know, has had some very serious issues with long-term deflation, a shrinking and aging population, credit bubbles, a busted financial system and a Nikkei 225 Index that is still just half the peak level it registered in 1989 — 30 years ago. That is the kind of future China could face.
In that light, Sara Sekine, a Nikkei reporter, saw a story I penned about the likelihood of a “hard landing” in China, so she called our corporate office and got my cell phone and contacted me the next day. As a good reporter, Sekine asked me some hard and pointed questions. The hardest, and the one that I could not precisely answer, was this: “When is this Chinese hard economic landing going to arrive?”
I could not answer this question because I do not believe it is possible to answer it with precision, yet I do believe the recession, when it comes, will be absolutely brutal due to the monstrous debt overhang that has built up in the Chinese economy over the past 20 years. Whether it ends up like the Great Recession of 2008 or the 1930s Great Depression will depend precisely on the Chinese government policy response.
The Great Depression, starting in 1929, could have been only a bad recession if it were not for the collapse of global trade caused by the 1930 Smoot-Hawley Tariff Act. The longer name of this disastrous Act was: “An Act To provide revenue, to regulate commerce with foreign countries, to encourage the industries of the United States, to protect American labor, and for other purposes.”
While there has been no “Donald Trump Tariff Act” that has passed Congress, the president is disrupting U.S.-China trade relations and it could get a lot worse before it gets better. His policies sound eerily similar to the long title of the Smoot-Hawley Tariff Act. As hopeful as this situation looked two weeks ago, it now looks like tariff tensions could last for a long time.
Despite the similarities with Smoot-Hawley, the key difference is that the tariffs are not a response to a deteriorating economy in the U.S., but due to predatory trade practices by China. The Chinese buy on purpose more from neighbors and key partners to increase their political influence and purposefully less form the U.S. In that regard, President Trump is 100% right to make trade an issue with China.
Sun Tzu-style maneuver
Unlike the 1930s, it is unlikely that a bilateral trade war can cause a recession in the U.S., although a heightened degree of uncertainty can disrupt the savings and investment cycles, which would ultimately disrupt economic activity. In China, however, there is too much debt in the system and too much reliance on exports. As Trump has pointed out so often, China exports more than $500 billion to us, but we export just over $100 billion to them, so “they” have a lot more to lose in a prolonged trade war.
The other problem in China — which has nothing to do with the trade war — is the monstrous debt bubble. Due to their infamous lending quotas of state-run banks and their loosely regulated shadow banking system, the total debt is hard to calculate, but we know that it has ballooned in the past five years. By credible estimates, China’s total debt-to-GDP ratio has grown from 100% to about 400% in the past 20 years, if one counts the shadow banking system omitted from official statistics.
Could it be that the Chinese never intended to make a serious trade deal? Could it be that the only way to inflate away a (big) part of their mountain of debt is to devalue the Chinese yuan USDCNY, +0.0564% and the only way the world financial community would accept such a devaluation would be as a response to a 25% U.S. tariff? It sure could, as such a calculated failure of the trade negotiations would be a maneuver worthy of true Sun Tzu disciples.
The yuan was once devalued by 34%, in December 1993. Such a devaluation today would put it near 9.31 per dollar (see chart). It closed Friday at 6.95. Such a devaluation, if it comes, would be a profoundly deflationary event for the global financial system, after which I would expect the 10-year Treasury TY00, +0.31%to drop below 1%. The 34% overnight drop capped a period of yuan devaluation that had started in 1989 when the dollar-yuan was 3.73 and ended up at 8.73 in January 1994.
Devaluing the yuan is inflation thievery. Such a devaluation, if it comes, would cause a deflationary shock in the global financial system and cause inflation in the Chinese domestic economy to surge. In the infamous 1989-1993 yuan devaluation period, inflation in China reached almost 30%. At last count China’s CPI is rising at an annual rate of 2.5% (see chart).
It is key to remember that coupon payments on debt are made in nominal yuan, while inflation in China is directly related to a number of policies, one of which is the management of the exchange rate. A devaluation would create the necessary nominal yuan to service their mountain of debts. If they had used such devaluation policies aggressively in the 1989-1993, who is to say they wouldn’t use them again?
To the disappointment of the Nikkei reporter who called me after I discussed these same issues six months ago, I do not believe that the exact sequence of such events can be predicted ahead of time with precision. The trigger here is the yuan devaluation, brought on by a cracking financial system and a faltering Chinese economy due to the pressure of trade frictions. Many of these events are contingent on policy decisions that are yet not known to have been made with a high degree of certainty.
Only a select few around Chinese President Xi Jinping know if such a decision on the yuan has been made, and they are not talking. Still, I do believe the chances of a yuan devaluation are high and that such a devaluation may happen soon if the trade war with the U.S. intensifies, as it seems to be doing at this very moment.
STOCKS UNDER $10
STOCK COME BACK
SAME DAY DELIVERY
MORTGAGE RATES DECLINED
The Mortgage Bankers Association (MBA) released its weekly report on mortgage applications Wednesday morning, noting an increase of 2.4% in the group’s seasonally adjusted composite index for the week ending May 17. Mortgage interest rates decreased or stayed the same on four of five types of loans the MBA tracks.
On an unadjusted basis, the MBA’s composite index rose by 2% in the past week. The seasonally adjusted purchase index decreased by 2% compared with the week ended May 10. The unadjusted purchase index slipped by 3% for the week and was 7% higher year over year.A Home Your Dog Deserves
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Mortgage loan rates for a top-tier 30-year fixed-rate loan decreased from 4.24% to 4.15% last week, according to Mortgage News Daily. As of Tuesday night, top-tier borrowers were paying 4.23% for that loan. The yield on a 10-year U.S. Treasury note inched up last week from 2.41% to 2.43% as of last night’s close. A year ago, the 10-year note yielded 3.06%.
Joel Kan, MBA’s Associate Vice President of Economic and Industry Forecasting said:
Mortgage rates fell for the fourth straight week, with the 30-year fixed rate mortgage hitting its lowest level since January 2018, leading to a rebound in refinances. … We’re keeping a close eye on whether there may be some adverse effects of the ongoing global trade disputes on overall demand. Some potential homebuyers may be delaying their home search until there’s more certainty.
The MBA’s refinance index increased by 8% week over week, and the percentage of all new applications that were seeking refinancing rose from 37.9% to 40.5%.
Adjustable rate mortgage loans accounted for 6.8% of all applications, up 0.5 percentage points compared with the prior week.
According to the MBA, last week’s average mortgage loan rate for a conforming 30-year fixed-rate mortgage dipped from 4.40% to 4.33%. The rate for a jumbo 30-year fixed-rate mortgage remained unchanged at 4.24%. The average interest rate for a 15-year fixed-rate mortgage remained steady as well, at 3.78%.
The contract interest rate for a 5/1 adjustable rate mortgage loan fell from 3.82% to 3.57%. Rates on a 30-year FHA-backed fixed-rate loan increased slightly from 4.32% to 4.34%.
BEST PERFORMING STOCK
Apple Inc. (NASDAQ: AAPL) shares were battered when it made its last earnings announcement. Among the bad news was slowing sales of its iPhone flagship, which has driven revenue growth for nearly a decade. Some investors said Apple would need to post better results to fuel a stock bounce back. However, that observation was not accurate. Apple’s shares have risen 33% in the past three months.
On January 29, Apple announced earnings for the quarter that ended on December 29. Revenue for this period included sales for the critical holiday period. Revenue fell 5% to $84.3 billion. Apple had not had a quarterly drop in revenue compared to the same quarter a year ago in over five years. To make matters worse, iPhone revenue dropped 15% over the same period.
A chorus of criticism began the day of the earnings release. Apple had priced its new iPhones at too expensive a level. Some versions of the iPhone X cost over $1,000. Apple had not innovated enough with the latest iPhone. Its camera and chip upgrades were not sufficient to draw people who might upgrade. The phone was not compatible with the new superfast 5G wireless networks.
Additionally, Apple had sales problems in China, the world’s largest wireless market. The price of iPhones was an issue. So was the fact that Apple competes not only with archrival Samsung in China. The country has four local smartphone makers that eat up much of the market: Huawei, Xiaomi, Vivo and Oppo. Tim Cook, Apple’s CEO, has often said that the iPhone cannot continue to be a huge success without strong sales in China.
Apple has the additional problems that sales of the Mac have never come close to the sales of PCs and have not grown much in recent years. And while Apple dominates the “wearables” market with its Apple Watch, it has never become a large consumer electronics category. Whatever drag the iPhone has put on Apple revenue, other hardware products can’t make up for.
Apple’s share comeback has been based on comments the company made when it announced earnings. Services revenue would become the new iPhone, the engine of Apple’s success. Services revenue rose 19% last quarter to $10.9 billion. Analysts expect that services will make up a growing percentage of revenue in upcoming years.
But Apple had to show some sign that services revenue would indeed improve. In the weeks after earnings, Apple started to make services-related announcements. Its language software Siri could help people with tracking health and fitness. Stamford Medicine announced that based on a study of 400,000 people: “As part of the study, if an irregular heart rhythm was identified, participants received a notification on their Apple Watch and iPhone, a telehealth consultation with a doctor and an electrocardiogram (ECG) patch for additional monitoring.”
Apple released a new credit card program with an expanded list of features and merchants. The card also has a cash-back program
But Apple’s biggest announcement was Apple News+. The service allows consumers with Apple devices to have access to over 300 news and feature journalism sources for $9.99 a month. The programs have had some critics. However, some publishers said it would transform their subscription models.
Apple has been able to leave weak earnings numbers behind, at least as far as Wall Street is concerned. Its shares are up 33% in the past three months, while the S&P is only 16% higher.
Target Corp. (NYSE: TGT) continues to demonstrate that it does not intend to get steamrolled by rivals Walmart Inc. (NYSE: WMT) or Amazon.com Inc. (NASDAQ: AMZN). The company announced Thursday morning that it is rolling out a same-day delivery service from 1,500 stores in 47 states for some 65,000 items available at the store’s website.
The service comes in two flavors: a per-delivery charge of $9.99 or an annual subscription fee of $99 (following a free, four-week trial) on orders of $35 or more. Deliveries will be handled by Shipt, the company that Target paid $550 million for back in 2017.
Both Walmart and Amazon recently added next-day delivery plans, and Amazon Prime’s $119 annual subscription already includes free same-day delivery in limited areas for more than 3 million items on orders of $35 or more. Non-Prime members can receive same-day service for $9.98 per order. Walmart expects to have same-day delivery available at 1,600 U.S. stores by the end of this year.
Last week, Amazon one-upped Walmart’s free next-day delivery service for some 200,000 products in a limited number of cities. Amazon said Prime members could choose from among 10 million items for free next-day delivery, although Amazon, too, offers the service only in limited areas.
The arms race in delivery services is all about keeping up with the competition. If Target, Walmart and Amazon are all offering the same (or nearly the same) delivery options, that gives customers one less reason to flee to a competitor. It’s all about loyalty.
Walmart promises low prices. Amazon offers virtually every product under the sun. Target offers its Redcard loyalty program with discounts and other promotions for cardholders. Each retailer’s customers choose to shop at the store that offers what they value most. Only if they can’t get it at their first-choice store will they look elsewhere.
Target’s same-day delivery service raises the bar a little higher. Amazon does not yet have 1,500 warehouses from which the company could ship goods the same day. Walmart will have an equivalent service by the end of the year, but already-thin margins will be further strained by threatened tariffs on Chinese imports and pressure on Walmart to raise its prices.
Daniel Cullinane CPA
25 Plaza 5 25th fl Jersey City NJ phone 732-516-1648 fax 732-516-9778
2500 Plaza 5 25th fl Jersey City NJ 07311 phone 732-516-1648 fax 732-516-9778